BATS seeks to challenge NYSE with retail plan

BATS Global Markets has
followed US exchange rival NYSE Euronext by proposing a retail price
improvement (RPI) initiative for its BYX Exchange.

BATS’ plan, a one-year pilot
that is subject to approval by the Securities and Exchange Commission, is
designed to allow retail orders to match against each other and provide price
improvement relative to the national best bid or offer.

The programme will result in
the creation of a new class of participant on BATS known as retail member
organisations (RMOs). All members of BYX – one of two US equity markets offered
by BATS – can obtain certification to submit ‘retail price improvement’ orders
that offer price improvement in US$0.001 increments for order submitted by
RMOs.

Firms that want to become RMOs
must have a retail trading business or handle retail orders on behalf of
another broker-dealer. All NMS securities priced at US$1 and above will be
included in the new scheme.

To distinguish its offering
from NYSE Euronext’s, which went live on 1 August, BATS will allow retail
orders to trade against price improving liquidity that doesn't originate from a
RPI order, allow retail orders to execute at more than one price point and charge
all members the same fee for entering RPI orders. Under NYSE’s offering, designated market making firms will benefit from trading
fee discounts for providing liquidity.

“At the core of our RPI
program is a unique competitive dynamic, one that we believe will encourage active and broad participation among our many diverse exchange members,” said
Joe Ratterman, chief executive of BATS Global Markets. “Our goal with the RPI program
is to provide consistent and meaningful price improvement for retail investors,
which in turn can enhance the overall trading experience for all of our
participants.”

Speaking after the approval of
NYSE’s retail liquidity programme at the end of July, Ratterman admitted that
the plan would have a “major impact” on the industry and lead to competitive
responses for years to come.

“This
approval sets the stage for what I believe will be a fundamental shift in the
way equity exchanges operate, the doctrine by which exchanges interact with
their customers, and how exchanges and off-exchange venues compete with each
other,” Ratterman said at the time.

As part of its proposal, NYSE
submitted plans to offer trading in sub-penny increments
for stocks above US$1, a source of much contention among market participants.

Stocks priced
over US$1 traded on exchange have a minimum tick size of US$0.01, but – prior
to NYSE’s proposal – the same was not true for off-exchange trades. This
allowed market makers like Citadel or Knight Capital to offer better prices for
retail orders compared to exchanges